| Stop shopping; Give cash as a gift |
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A single person can give up to $12,000 a year in 2006
(married couples can double that amount) to any number of recipients
without any tax ramifications for either the giver or the recipient(s).
Such a gift can go to a favored relative, or you can spread the
wealth around to all the grandkids. In fact, the money can go to
anyone -- not just to family.
Educational cash
A gift for kids that will pay off later is an education savings
plan. There are two key tax-preferred options: the Coverdell Education
Savings Account and state-sponsored college savings plans. Neither
offers the giver a federal tax deduction, but both grow tax-free.
The Coverdell
account allows a maximum annual contribution of $2,000 per beneficiary;
one person can put in the whole two grand or several can pool their
resources to meet the maximum for the student's account. Its advantage:
It can be used to pay elementary and high school expenses as well
as college costs. Higher-income contributors, however, may find
they cannot contribute the maximum amount to this type of account,
since income limits apply.
College accounts run by individual states come in
two varieties. Section
529 savings plans are more flexible, but don't overlook prepaid
tuition contracts. In either case, the law allows families to use
up to five years' worth of their annual gift tax exclusion all at
once, meaning well-off gift givers could pay up to $60,0000 ($120,000
for married persons filing jointly) toward a child's education.
A large lump-sum gift could have advantages and disadvantages,
points out William Romano, vice president of Romano Bros. and Co.,
a financial planning company in Evanston, Ill. If the 529 plan money
is invested in the stock market and it does well, it could grow
quickly, but the opposite could happen if the market stumbles. If
you choose a prepaid tuition plan, giving the full gift at once
can lock you in at today's tuition costs, which should be lower
than in future years.
A gift for later
Another financially savvy gift for kids on your list is a Roth
IRA. As long as the child earned money, you can put up to $4,000
or the child's total wages, whichever is less, into the retirement
account for the young worker. The money will grow tax-free and could
be a hefty amount by the time the child is eligible to use it, either
for retirement or earlier, as a first-home down payment.
Sharing existing assets
Investors might consider giving stock they already own as a gift.
The new owner assumes your cost basis, meaning when he or she sells
the stock, capital gains taxes will be due if the stock has appreciated
since purchase. But if the recipient is a child or someone who doesn't
have much income, taxes may be relatively insignificant. They'll
still face sales commissions, but using a discount brokerage could
mitigate those costs.
Romano points to another way to simultaneously free
up money and do good. If you own stock that has appreciated nicely,
consider giving it to charity. You get a tax deduction based on
the value of the stock on the day you donate it. Plus, there are
no commissions or capital gains taxes due.
The money saved in taxes can be given as a gift to
a loved one. Santa couldn't do any better.
Jennie L. Phipps is a contributing
editor based in Michigan who has received many fine gifts from her
relatives.
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